Last Resort? Why?

By John Krajsa
AFC Reverse Mortgage

A reverse mortgage is a type of loan that is distinguishable from other loans primarily by the fact that no monthly mortgage payments are required. There was a time when there was one FHA program with one set of interest rates and fees. But that was years ago. Today rates and fees vary. Some have closing costs that are higher than other loans. Some do not. Many FHA insured reverse mortgages are offered with interest rates, for example, that are below the prime rate. In today’s market monthly adjustable rates in the neighborhood of 2% are frequently available. Today many homeowners are shocked not by the high cost but by how reasonable the cost is in many reverse mortgage programs. So, since there is no “they” regarding reverse mortgages, it makes no sense to make a generalization as to when “they” should be used. In our view, when and where a reverse mortgage makes sense can only be determined on a case by case basis. Telling homeowners when to use a reverse mortgage without any knowledge of their personal situation is not only a bad idea, but can in fact be harmful. See our blog entry next week.

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Choosing a Home Care Service

By John Krajsa
AFC Reverse Mortgage

Making the decision to hire a home care service to provide care for your loved one is an important decision and can, at the same time, be very difficult. If an illness or recovery from surgery requires nursing care or physical therapy, a physician may order skilled home care services that provide both skilled providers and personal aides. Your decision is then based on the obvious medical determinations made by the doctor. But what if you as the family caregiver must determine the extent of care needed without the help of a doctor?

Each home care situation is unique. In the beginning, family or friends step in to help with simple tasks and support for aging seniors who want to stay in their homes. As long term care needs progress, more time is required to manage those needs. Physical and mental conditions change with aging making usually routine hygiene and daily living activities difficult for an aging individual. Even with the healthiest of seniors, the ability to drive a car, shop for groceries or do general housekeeping eventually needs to be relinquished to the responsibility of another person.

In one example, Karen, would stop by her parents’ home on her way to work every morning and again on her way home from work in the evening. She checked in the morning to see that they were up and ready for the day and Karen would take a shopping list for things they needed. In the evening she delivered the needed items she had purchased during her lunch break and sometimes she fixed a meal when one was not prepared by her mother. This worked well until Karen began to notice her father did not shave or dress during the day and both parents were forgetting their medications. Karen felt more time and supervision was needed in their care but with her own family and job, she could not do it. Non-medical or personal home care services would be a good option for Karen to consider.

Before starting your search for a non-medical or personal home care company, determine what the care needs are and how much time each week will be required for assistance from the company. You may want to consult with the family physician and other family members as well as experienced social workers or care managers to determine needs. Most home care companies, as well, will help you do an assessment at no charge. With your care needs in hand, you are ready to begin your search.

The National Association for Home Care & Hospice (http://nahc.org/home.html) gives the following guidelines and checklist in searching for a home care company.

•  How long has this provider been serving the community?
•  Does this provider supply literature explaining its services, eligibility requirements, fees, and funding sources? Many providers furnish their home care clients with a detailed “Patient Bill of Rights” that outlines the rights and responsibilities of the providers, clients, and family caregivers alike.
•  How does this provider select and train its employees? Does it protect its workers with written personnel policies and malpractice insurance? Does it protect clients from theft or abuse by bonding its employees?
• Does this provider assign supervisors to oversee the quality of care clients are receiving in their homes? If so, how often do these individuals make visits? Who can the client and his or her family members call with questions or complaints? How does the company follow up on and resolve problems?
• What are the financial procedures of this provider? Does the provider furnish written statements explaining all of the costs and payment plan options associated with home care?
• What procedures does this provider have in place to handle emergencies? Are its caregivers available on notice?
• How does this provider ensure client confidentiality?

If a home care company has not previously been recommended to you, ask for a list of previous clients and call for their experience with this provider.

Following up on these guidelines can help you determine the quality of personal care that is given. Many states license non-medical home care companies and require both legal and health standards to be maintained.

Read about individual home care companies in your area on the National Care Planning Council’s website www.longtermcarelink.net

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Use Of A Reverse Mortgage To Pay For Home Care Service

By John Krajsa
AFC Reverse Mortgage

A fairly common use of reverse mortgages is to provide the funds for in home care. Although the money from a reverse mortgage cannot pay for these services indefinitely, reverse mortgage funds when combined with other assets can extend the period of time that such services are available.

In a typical situation the homeowners working with family members get to the point that family and friends can no longer provide the necessary services and an evaluation is made of the available assets. When staying in the home as long as possible is the goal, sale of the home to raise funds is not an option, and consideration is given to borrowing against the home. Conventional financing is usually ruled out since the homeowners are likely not employed, may be the object of the care being obtained, and in any event, cannot qualify for conventional financing. Enter the reverse mortgage, specifically the FHA insured Home Equity Conversion Mortgage (HECM). Since no monthly mortgage payments are required, there is no income test for a reverse mortgage, and, yes, even the homeowner who is the object of the care and may be unemployed and unemployable can qualify for a reverse mortgage. So through a reverse mortgage the home can serve as an additional pot of cash along with other resources to help pay for in home care.

Some of the factors to be considered in choosing a home care service were recently addressed in an article from the National Care Planning Council. More on that next week.

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Reverse Mortgage Example

By John Krajsa
AFC Reverse Mortgage

A reverse mortgage must always be in first position and sometimes it is not possible to do a reverse mortgage if the amount currently owed in existing mortgage debt exceeds the amount of money available from the reverse mortgage. However, where there is a first and second mortgage or home equity loan, it is possible to pay off only the first mortgage and to subordinate the second mortgage, that is, place the second mortgage behind the reverse mortgage. In a recent example the same bank held both a first and a second mortgage totaling about $240,000 but the homeowner qualified to borrow only $220,000 in a reverse mortgage. It appeared the reverse mortgage would not be possible. However, the bank agreed to accept the $220,000 and subordinate the remaining $20,000. From the bank’s perspective, they got most of their money without having to go through the expense of foreclosure. From the borrower’s perspective, they were able to stay in their home and dramatically reduce their monthly mortgage payment from over $2000 per month. It is likely that in 3 or 4 years the remaining balance will be paid off and the homeowner’s monthly mortgage payments will be completely eliminated.

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NRMLA/NCOA Pilot Program

By John Krajsa
AFC Reverse Mortgage

A reverse mortgage has been described as an “extra pot of cash” that can improve cash flow by eliminating monthly mortgage payments and/or by simply providing additional cash. The improved cash flow from a reverse mortgage can greatly increase the amount of time homeowners can afford to stay in their home. However, if at some point the homeowners can no longer pay their household expenses such as real estate taxes, homeowners’ insurance and utilities it may be necessary to sell the home. None of us, after all, know if we will be able to stay in our homes indefinitely. The National Reverse Mortgage Lenders Association (NRMLA) and the National Council on Aging (NCOA) have initiated a pilot program to assist homeowners achieve a “soft landing” when they can no longer afford to stay in their home. We’ll have more on the pilot pgrogram next time.

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Reverse Mortgage Changes – HECM Saver

By John Krajsa
AFC Reverse Mortgage

Change is coming to the FHA HECM reverse mortgage program. The new HECM Saver is being introduced this month. As we understand it, the basic concept is that HUD is in effect eliminating the up front FHA insurance premium in exchange for a loan amount somewhat lower than would otherwise be available. Although HECM closing costs are financed as part of the reverse mortgage, the up front FHA insurance premium has been the “elephant in the room” when it comes to HECM closing costs. Its elimination will be welcomed by many potential HECM borrowers.  We will have some examples of the new program and how it compares to the traditional HECM (which will still be available) in future weeks.

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Cost of a Reverse Mortgage – TILA vs. APR

By: John Krajsa
AFC Reverse Mortgage

The last few weeks we have pointed out that periodic cost, not dollar cost, is the appropriate measure of the cost of a loan and that it is impossible to evaluate loan cost looking at dollar cost alone. Truth in Lending Act (TILA) loan cost estimates such as the Annual Percentage Rate (APR) are not perfect, but since 1968 have been the starting point for and by many are considered the gold standard in loan cost analysis. TILA disclosures use periodic cost in that they estimate the true cost of a loan expressed as an annual rate. For reverse mortgages the primary TILA disclosure is the Total Annual Loan Cost or “TALC” disclosure. Unlike the APR, which estimates the cost at one point in time, TALC disclosures estimate the cost of a reverse mortgage at various points in time.

Here are abbreviated TALC rate estimates as of June 17, 2010, for a Home Equity Conversion Mortgage (HECM) with youngest borrower age 76 and a home appraised at $250,000.

Available Fixed Rate Loan Amount                       $160,000
(Fixed Interest Rate 5.49%)                           

Available Adjustable Rate Loan Amount            $152,522
(Initial Interest Rate 2.10%*)             

 

The above numbers tell us that the estimated annual cost of the fixed rate HECM would be 8.88% after two years, but would drop to 6.52% after 15 years. The estimated annual cost of the adjustable rate HECM would be 7.75% after two years, but would drop to 3.45% after 15 years, based on current rates.

The fixed rate TALC numbers are actual, since the full amount is borrowed at closing and the rate is fixed. The adjustable rate TALC numbers are based on the current rate of 2.1%, and the actual long-term adjustable rate cost may be higher or lower than estimated due to rate adjustments and additional amounts borrowed.

The above TALC rates include ALL costs, such as financed closing costs (about $12,000 for the adjustable and about $8,000 for the fixed), FHA insurance premiums and monthly service fees, and of course, interest.

We should also note that the 5.49% fixed rate is not a 15 year or 30 year rate; it is a lifetime rate. The Annual Percentage Rate (APR) for the fixed rate version of the above loan is 6.47%.

The above TILA cost estimates, in our view, do not support the view that all HECM loans are expensive, but rather estimate the true cost of the above HECM to be very reasonable and to be lowest when used for its intended purpose, as a long-term solution.

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Cost of a Reverse Mortgage – Part III

By: John Krajsa
AFC Reverse Mortgage

Last week in “Cost of a Reverse Mortgage – Part II” we attempted to demonstrate how dollar cost, standing alone, can be misleading in evaluating the cost of a loan, since a loan is really a rental transaction. You don’t buy money; you pay a fee to use it for a period of time and then return it, and the appropriate measure of the cost of a rental transaction is the periodic charge, which in a loan is the annual rate.

The Federal government in the Truth in Lending Act, passed in 1968, originally provided us with the Annual Percentage Rate (APR), and more recently has provided us with the Total Annual Loan Cost rate disclosure (TALC) for reverse mortgages. These Federal cost estimates, found in Section 226 of Regulation Z promulgated by the Federal Reserve, estimate the true cost of a loan with cost expressed as an annual rate. Unlike the APR, the TALC disclosure for reverse mortgages always includes all costs (closing costs, FHA insurance premiums, monthly service fees and, of course, interest). Also, unlike the APR disclosure which only estimates the cost of a loan at one point in time, TALC rate disclosures estimate the total annual cost of a reverse mortgage at various points in time.

Consumer advocates have praised the TALC as “. . . more complete than the Annual Percentage Rate (APR) disclosure required for other loans.” TALC disclosures generally estimate the total annual cost of a reverse mortgage to be higher in the early years and lower as time goes on, and to be lowest when the loan is used for its intended purpose, as a long-term solution. We’ll talk more about TALC rates next week.

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Cost of a Reverse Mortgage – Part II

By: John Krajsa
AFC Reverse Mortgage

Last week in our post on “Cost of a Reverse Mortgage” we commented on how some analysts tend to focus on the dollar cost when evaluating Reverse Mortgages. When you think of it, isn’t it really impossible to evaluate whether the dollar cost of a loan is reasonable without knowing the annual rate associated with that cost? For example, what if a lender said, “I’ll charge you $50,000 to borrow $100,000 for 10 years.” That $50,000 is 50% of the $100,000 borrowed, but does that mean that $50,000 is too much to pay for this loan?

What if a lender said, “I’ll charge you $10,000 to borrow $20,000 for 5 years. Is that a fair charge? The $10,000 is 50% of the $20,000 borrowed, just as the $50,000 is 50% of the $100,000 borrowed.  Does that tell you anything about whether the amount charged is fair?

What if you knew that $50,000 is the total amount you would owe if you borrowed $100,000 at a 5% annual rate for 10 years ($5000 per year x 10)?  What if you knew that $10,000 is the amount you would owe if you borrowed $20,000 at a 10% annual rate for five years ($2000 per year x 5)? Now you know that the first loan is a 5% annual rate loan, and the second is a 10% annual rate loan, you have a means to evaluate the dollar charge.

You may agree that the periodic charge (the annual rate) works, but why? The reason is that a loan is a rental, not a purchase transaction. In a rental transaction you pay a fee for use of an item for a period of time, and a rental transaction is evaluated by the periodic charge, not the total charge over time. As would be true in any rental transaction, the total dollar charge for a loan is the total of all of the periodic charges for the time you have borrowed (or rented) the money. The longer you borrow the money, the higher the dollar charge, but no matter how long you borrow (or rent) the money, isn’t it the periodic charge that determines if the price is fair?

More to follow next week.

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Senior Citizen Housing – Overview of Challenges

By: John Krajsa
AFC Reverse Mortgage

Many older Americans are finding it very challenging to be able to stay in their home as they grow older.  Some of the reasons are health issues that tend to increase with age, but others find that instead of their home being their safety net, it has become a financial burden. 

What older Americans need to consider is the question, “is staying in my home the right option for me”?  There are many things to consider besides the financial side of things.  And what’s important to remember is that every situation is unique and there isn’t one answer that fits all scenarios. For example, most existing homes today were not built with a view to being used by an aging population. Doorways may be too narrow for a wheelchair to pass through. Although  stair glides may be a lifesaver, not all stairways can accommodate them. The concept of “Universal Design;” where a home is planned for eventual use by seniors is unfortunately a new idea. Other non-financial factors are addressed starting on Page 3 of the NCOA “Use Your Home to Stay at Home” guide.

As many American face these tough questions, we will take a look next week at what resources you have to help.  Stay tuned.

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